Corporate Social Responsibility and Directors' Duties: A Historical Perspective, Exams of Law

Download Corporate Social Responsibility and Directors' Duties: A Historical Perspective and more Exams Law in PDF only on Docsity! SOME ASPECTS OF MODERN COMPANY STRUCTURE: A COMMENT." In evidence given before the English Company Law Committee in 19601 a spokesman of the Trades Union Congrcss said that "modern conditions require Companies to accept social responsibility". An American author has written "the modern Corporation is an institution in search of a philo~ophy".~ Mr. Murray in his paper has quoted Lord Denning's suggestion that Directors should no longer be regarded as managing on behalf of shareholders only but that they should be regarded as representa- tives of "all vital interests". I am grateful to Mr. Murray for his paper for two reasons: Firstly, for the most interesting views which he has expressed, parti- cularly on investigations under Part VI of the Act, about which I don't feel competent to comment. The second reason why I welcome Mr. Murray's paper is that I hope it gives me an excuse, Mr. Chair- man, for mounting my hobby horse. I think that the legal status of a Company as conceived in the original Joint Stock Company's legisla- tion, and still largely preserved in the modern Companies.Acts, should not be undermined. In a study undertaken in America entitled "the Corporation and the Economy" the conservative view was put thus:-3 "We treat the Corporation, to some extent, as having the rights and responsibilities of an individual. Particularly, there is an overtone of moral responsibility. I don't under- stand, in theory, how a Corporation which does not have a soul or conscience can be said to have certain responsibili- ties and how you can attach responsibilities to such a zombie ?" This view echoes Lord Lindley's judgment in Citizens Life Assurance Co. Ltd. v . Brown4:- "To talk about imputing malice to a Corpora- tion appears to their Lordships to introduce metaphysical subtleties which are needless and fallacious." A paper read at the 1966 Law Summer School held at the University of Western Australia. 1 CMV. NO. 1749 (1960) . 2 R. EELS, THE MEANING OF MODERN BUSINESS, (New York, 1960) 1. 8 See RUBNER, THE ENSNARED SHAREHOLDER, 24. 4 [I9041 A.C. 423, at 426. We have heard this morning of the case of Parke v. Daily News Limited.5 In his judgment in that case Mr. Justice Plowman quoted with approval the judgment of Lord Justice Bowen in Hutton v. West Cork Railway C O . ; ~ that case turned on the powers of the Directors of a Company to make gratuities. The Learned Lord Justice said:--' "A railway company might send down all the porters at a railway station to have tea in the country at the expense of the company. Why should they not? It is for the directors to judge provided it is a matter which is reasonably in- cidental to the carrying on of the business of the company . . . the law does not say that there are to be no cakes and ale, but that there ai-e to be no cakes and ale except such as are required for the benefit of the company." He then referred to a case in which it was held lawful for a Com- pany to expend a weeks wages as gratuities as this eased friction between master and servant and so benefitted the Company, Lord Justice Bowen commented : -8 "It is not charity sitting at the board of directors, because as it seems to me charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who practise it and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board, but for no other purpose." Section 19(a) and (b) of the Companies Act enlarges Directors' charitable powers, in my view, unfortunately, so that I conceive that a charitable or patriotic gift by the Company need no longer be in the best interests of the Company. You will note that the powers conferred by this section cannot be excluded by the Memorandum. It is not unknown for a Company Chairman, by means of donations from Company funds to attain high office in some respected chari- table or patriotic institution and thereby to gain a knighthood for himself. Mr. Murray referred to Goyder's theory that Companies owe their responsibilities not only to their shareholders but also to their worken, consumers and the community. Although I do not deny that 5 [1961] 1 W.L.R. 493. 0 (1883) 23 Ch.D. 654. 7 Zbid., at 672. 8 Zbid., at 673. fleeced investors and creditors for their own enrichment; the second, during which Directors, without transgressing the law, oppressed their shareholders for the greater glory which they hoped to derive from an arbitrary control of a growing Corporation."l0 In America the situation seems as bad. According to an article in the Harvard Law Review quoted by our own Ex-President in his new book on Company Directors-"the management holds its powers in trust, yet it enjoys the perquisites of property . . . at law the directors are trustees for the stockholders, and the management are agents of the directors. But as the Trustee becomes independent and the agent usurps the office of the principal the law lags far behind."ll I t is a commonplace noted by most authors that, in Mr. Adams' words, "Shareholding is no longer ownership, but a form of passive absentee profit sharing contract."12 According to the author of the chapter on companies in Law Reform Now, "failure by shareholders to take an active interest in the affairs of their company encourages the contempt in which the management holds them and the lack of information found in the accounts; and accounts which are not in- formative do not serve to encourage the shareholders to take an intelligent interest in the affairs of their company."la At present, for example, most Companies still adhere to the method of accounting based on depreciation from historic cost. Some evidence was given to the Jenkins Committee in favour of compulsory periodic revalua- tions of assets which is already mandatory in France; but the Com- mittee made no recommendations. The shareholders lack of informa- tion was highlighted shortly afterwards during the take-over battle between the Boards of I.C.I. and Courtaulds. The Board of Cour- taulds, in response to 1.C.1.'~ take-over bid "revealedaa to its share- holders that Courtaulds' accumulated reserves alone were enough to cover the price put upon that Company's shares by the Stock Ex- change. Its Directors suddenly "found" that they could immediately distribute to their shareholders a bonus of ten shillings worth of 7% loan stock for each ordinary share, could promise substantially larger dividends in the future and a capital distribtion to each ordinary shareholder in each of the next three years-all this largesse was to come out of the reserves which had not been apparent from the Com- pay's earlier published accounts and, I suspect, would never have been become known to the shareholders had not the bid been made! G ~ w e r ' ~ recognises that whilst a Company must not cook its books to show a profit when there is none, as Lord Kylsant did, it is more likely that a modern management will cook its books to present the Company to the Revenue, its workers and its members as kss affluent than it really is. There is a very good reason for this. In the bad old days Companies had to issue fraudulent prospectuses to gull investors into subscribing equity capital. The modern giant corpora- tion aims at becoming self-financing so that its Directors need not maintain a generous dividend record to attract new public investors. If the law effectively compelled Directors to keep their share- holders well informed in prosperity as well as in adversity, the share- holders would take more interest in their Company. I concede that shareholders must not be permitted to interfere directly with manage- ment decisions of the Board and I am opposed to government by general meeting, but I think that Directors should be compelled to have more regard to the interests of their shareholders and pay more respect to their wishes. To this end I favour a reform in the election of Directors of large public companies. In half of the States of America as well as in Canada and in India cumulative voting is compulsory. It is a kind of proportional representation which should appeal in Australia. Under this system if, for example, five Directors are to be elected, a disciplined minority of 209% of members can ensure the election of one Director of its choice. Under the present system even if all members vote, which is unheard of, 51% of members can elect the whole board. Experience has shown that with cumulative voting and no staggering of elections, members of large corporations have managed to elect one or more Directors who really represent their interests. Mr. Murray pointed to the need for a distinction between the liabilities of full-time and part-time Directors. At present part-time Directors are usually public figures elected by the management to lend it respectability in return for a substantial fee paid for doing little or nothing-in England they are known as 'guinea pigs'. If instead of 'guinea pigs' we could have part-time Directors democratically elected by the shareholders to watch over the executives I would welcome such a distinction. Finally, I would like to vest in the members of a Company the decisive control over the basic objectives of the Company. The old law of ultra vires was undoubtedly an engine of fraud and caused hardship. It was anyway largely evaded by the vaguest formulation of a Company's objects. Lord Wrenbury noted with distaste in 14 Gown, MODERN COMPANY LAW (2nd ed.) , 424. Cotman v. Broughom16 that "the function of the memorandum is taken to be, not to specify, not to disclose, but to bury beneath a mass of words the real objects of the Company with the intent that every conceivable form of activity shall be included somewhere within its terms".16 Whilst therefore, I welcome the innovations in section 20(1) of our Act, I doubt if there remain sufficient safeguards for the shareholders. The law should make it compulsory for Directors to obtain the prior consent of shareholders, perhaps by Special Resolu- tion, before important assets are sold, the main activity of the Com- pany is changed or an entirely new field is entered. 16 [i9141 A.C. 514. 16 Zbid., at 521. MA. (Oxon.): Barrister and Solicitor of the Supreme Court of Western Australia.